As the market falls in these uncertain times, could this be the best time to cherry-pick?

The COVID-19 pandemic is an event none from our generation has experienced. To that extent, investors and speculators are in the dark about the final outcome and hence the current market panic. But as Warren Buffett has always emphasised, the secret of investing success is to be fearful when others are greedy and greedy when others are fearful.

Sounds great but being ‘greedy’ when there is gloom, is really difficult. And that’s not only because it requires nerve to bet against the crowd. Mostly, when catastrophe strikes, you are low on liquidity, or there is great uncertainty over future cash flows. The future looks hazy — will things get worse, how much more, and when will they get better and so on.

But then, as history has depicted, gloomy times provide the best opportunity to buy into the ‘right businesses’ with an adequate margin of safety. Are we at that point where investing can be hugely rewarding? Yes and no. It will depend greatly on which stocks you pick.

Even today, after a 30% correction, many stocks still do not represent deep value and therefore unlikely to yield handsome return even with a longer holding period. Over the past few years, the market has been polarised in favour of consumer stocks because of heightened stress in core sector and financials. Several consumer stocks have taken a beating but they continue to be highly valued. For all we know, this may be an inflection point, but there is also a possibility that this will continue to be the case because earnings visibility of other sectors will worsen with further demand destruction, higher delinquencies and delay in the private investment cycle.

While it may take some more time to figure out who will be the front runners when sentiment revives, the multiple you are paying for downgraded earnings should be the criteria to pick stocks. In short, it’s not how much a stock has fallen from the peak that should determine your purchase decision, but how justified is the valuation from a future earnings perspective. Investment return, after all, is driven by earnings and earnings alone.

Our annual feature, "My Best Pick”, comes this year at an interesting time. Keeping with tradition, we bring you 10 experts who present their best ideas. As usual, the disclaimer stands: these are not recommendations to buy, but ideas you could consider based on your personal portfolio.